Ethereum Funding Rate Spikes to 8-month High
13 Nov, 2024 ● Coin news
Ethereum surged to $3,444 on Nov. 12, marking its highest level since July.
This upward movement came on the news of the rise of Bitcoin to an all-time high of $89,957 before adjusting to $87,000 the same day.
Traders are now speculating whether the high leverage in Ether futures could make ETH vulnerable to a deeper price correction below $3,200.
Perpetual futures, also called inverse swaps, have an embedded fee designed to balance out excessive leverage.
When market sentiment turns overly bullish, the funding rate becomes positive. Rates up to 2.1% per month are considered neutral, given that crypto traders often lean optimistic.
On Nov. 12, Ether's funding rate spiked to 6.1% per month, the highest in eight months.
Such elevated rates are usually short-lived, as the cost for long positions becomes unsustainable, encouraging bears to short and benefit from the funding rate.
However, during bull markets, these high funding rates can persist for weeks.
In early 2024, Ether’s funding rate stayed at or above 2.5% per month in March.
Even with long position fees peaking at 11% per month, traders still managed to hold their positions for about two weeks.
Traders also have alternatives, such as monthly Ether futures contracts that offer a fixed premium, unlike the variable rate of perpetual contracts.
Another option is margin trading, where stablecoins are borrowed to buy more Ether on the spot market.
To determine if traders have become overly optimistic, the Ether options market is also examined. The 25% delta skew metric rises above 6% when downside protection is overpriced by arbitrage desks and market makers.
On the other hand, a negative 6% skew suggests increased market excitement.
Current data indicates Ether investors remain neutral, as the skew metric has not dropped below negative 6%.
This neutrality implies that the temporary spike in leveraged Ether futures demand does not signal excessive market-wide optimism.
If such widespread enthusiasm existed, the 6.1% monthly funding rate would be more concerning, but that is not the case now.
These derivative metrics may actually set the stage for further Ether price gains.
Some traders may have been caught off guard and lacked the resources to expand their positions during the weekend rally, hinting at a temporary leverage imbalance.
Additionally, the $513 million in net inflows to Ether spot exchange-traded funds (ETFs) in the United States between Nov. 6 and Nov. 11 suggests strong, healthy demand in the spot market, in contrast to the heightened appetite for derivatives.
Overall, there is no clear indication of an imminent risk of widespread liquidations even if Ether's price revisits $3,070, representing an 11% drop from its Nov. 12 high of $3,444.
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